Invoice Factoring - How does it work and how can you apply?

What is invoice factoring?

Invoice factoring is a type of invoice finance that enables a business to improve their cashflow by accessing cash for their unpaid invoices.
The business effectively uses their debtor book of unpaid invoices as security for the loan form an invoice factoring company. This allows businesses to access funds quickly rather than waiting for customers to pay their invoices.

The invoice factoring company will take over the responsibility of collecting payment from the customer. Once the customer pays the invoice in full, the factoring company deducts its fee (the discount) and remits the remaining amount to the business. The fee is typically based on factors such as the creditworthiness of the customer, the size of the invoice, and the length of time until payment is expected.

How does invoice factoring work?

Invoice factoring works by using unpaid invoices owed to your business as a way to access capital. 

The process works like this: 

1. Your business operates as usual, selling goods or services to customers and generating invoices.
2. Submit the invoice to the invoice factoring provider
3. The invoice factoring company instantly advances a percentage of the invoices total value, typically this is 90%. 
4. The invoice factoring company takes over the responsibility of collecting payment from the customers.
5. Once the customers pay their invoices, the factoring company deducts its fees and remits the remaining amount to your business.

Why use invoice factoring?

Get the funds you need without putting business or personal assets at risk with invoice factoring. 

• Fast Invoice Payments

Instead of waiting weeks or months for your invoices to be paid, you'll be able to advance a flexible percentage of their face value within as little as 24 hours. Once approved, some invoice factoring companies can arrange the transfer of your funds the same day.

• Outsource credit control

Efficiently managing your sales ledger and credit control processes can be time consuming. With invoice factoring, the factoring company takes over these key tasks for you by chasing up invoice payments, credit checking new clients and managing your sales ledger.

• Improved cashflow

Invoice factoring provides immediate access to funds, helping your business to maintain a healthy cashflow and meet financial obligations.

When should your business use invoice factoring?

If your business raises invoices and you find that regular outstanding invoices are impacting your cashflow, invoice factoring could be a good option for your business. 

You could use invoice factoring for: 

• Rapid growth

If your business is experiencing high growth and needs funds to support increased sales, invoice factoring can provide the necessary working capital.

• Seasonal fluctuations

If your business operates in a seasonal industry where sales fluctuate, invoice factoring can help bridge the cashflow gaps during slower periods.

• An urgent cash need

When unexpected expenses or opportunities arise, factoring allows businesses to access funds quickly without going through a lengthy loan approval process.

• Improved cashflow with timely invoice payments

Invoice factoring involves the factoring provider chasing your invoices from customers for you. As invoice factoring providers are experts in credit control, they can help to ensure your customers do not pay their invoices late. 
 

Who is invoice factoring for?

Invoice factoring is for any business that wants to improve their cashflow by avoiding lengthy invoice repayment terms and overcome the burden of chasing up overdue payments. 
Rather than spending much needed working capital on an in-house credit control team during the early days of your business, you'll be able to outsource these key tasks, leaving you to concentrate on growing your customer base.
 

To be eligible for invoice factoring, your business will need to:

• Raise invoices to customers
• Have creditworthy customers 
• Want to give credit control to the factoring company